CFTC Moves to Close the London Loop

The Commodities and Futures Trading Commission (CFTC) recently released a statement that it would require foreign exchanges dealing in U.S. oil futures to limit the number of contracts that could be held by an individual trader or firm. This is clearly an attempt to protect consumers reeling from what CFTC Commissioner Bart Chilton described earlier in June as “unusual price movements” in oil futures and other commodities.

“The bottom line”, noted Commissioner Chilton, “is that we need to investigate, in a comprehensive and probing manner, what is happening in these markets before making a rush to judgment about what is or what is not causing these unusual price movements,” he stated during an industry advisory commission meeting on June 10th.[1]

West Texas Intermediate (WTI) crude futures are traded on the New York Mercantile Exchange (Nymex) and also on London’s Intercontinental Futures Europe Exchange (ICE). Three quarters of all WTI futures are traded through the Nymex exchange with the remainder being traded electronically via the ICE network.

Currently, the CFTC requires Nymex to record all trades in WTI crude futures and imposes limitations on the total amount that individual traders and firms can hold. However, trades conducted over ICE are not reported as the Financial Service Authority (FSA) – the U. K.’s primary regulator – does not limit holdings.

ICE is able to offer an electronic market to U.S. investors through a “no-action” agreement with Nymex that permits ICE to trade West Texas Intermediate oil futures after hours. Known as the “London Loop”, this arrangement enables U.S.-based traders to continue dealing in WTI futures even after exceeding their Nymex limits. While the FSA has been hesitant in the past to enforce limits, it has agreed to share details of WTI trades with American authorities in order to minimize the possibility of price manipulation in oil futures due to expire.[2]

Pointing to recent examples of price manipulation in the energy sector including British Petroleum being fined more than $300 million by the CFTC for attempting to corner the propane and natural gas markets, Pierre Terzian of energy consultants Petrostrategies in Paris stated that the record price for oil is partly a result of price fixing.

“I have no doubt that people are actively manipulating the market for crude oil and other commodities including food. The whole world is suffering because of a lack of transparency in the financial markets.”[3]

Critics of the new reporting requirements say that closing the London Loop in this manner will merely shift offshore trading to other centers, suggesting it is “foolhardy” to impose regulations on one or two exchanges that are not enforced on others. WTI futures trading in London could indeed be vulnerable given that Dubai’s Gold and Commodities Exchange introduced three new oil futures contracts a mere two weeks ago. These contracts will deal in West Texas Intermediate, Light Sweet Crude, and Brent Crude, causing some London insiders to argue that most of London’s WTI oil trading will be lost to the Dubai exchange.[4]

While it may be too early to tell if this will be the result of the new regulations, it is clear that U.S. regulators intend to be seen as being proactive in protecting the integrity of the markets. In addition to its new agreement with the FSA, the CFTC also announced that a taskforce comprising the CFTC, the U.S. Federal Reserve, the Treasury, the Securities and Exchange Commission, the Department of Energy, and the Department of Agriculture has been established to determine to what extent financial speculation has contributed to the price of oil.[5]


  1. ↑ US Regulator Calls for Curbs on Oil Trading in London – The Times, June 13, 2008
  2. ↑ CFTC Boosts Oversight of Foreign Oil Trades – The Associated Press, June 17th, 2008
  3. ↑ FSA Helps US Clampdown on Oil Speculators – The Times, May 30, 2008
  4. ↑ Oil Traders Fear for London’s Position – The Times, June 14, 2008
  5. ↑ US Drivers Must Get Used to Paying $4 a Gallon – The Times, June 11, 2008

About the Author

Scott Boyd has been working in and writing about the financial industry since the early 1990s. As a technical writer and project manager with several of Canada’s leading financial institutions, Scott has produced educational materials for investment system end-users including portfolio managers and traders. Scott now administers and contributes to OANDA FXPedia and regularly provides commentaries for the OANDA FXTrade website.

This article is for general information purposes only. It is not investment advice or a solicitation to buy or sell securities. Opinions are the author’s — not necessarily OANDA’s, its officers or directors. OANDA’s Terms of Use apply.